COMPARATIVE MARKET ANALYSIS

KEY TERMS

Comparative market                           curb appeal                             gross living area

            analysis

OVERVIEW

This chapter begins with a discussion of the differences and similarities between a formal appraisal and a comparative market analysis (CMA).  Sources of information required to prepare the analysis properly are shown.  Because the appraiser should use only similar properties in the analysis, one section of this chapter shows the common elements of comparison and discusses how to adjust for differences.  Examples of computer generated CMAs are included.  The chapter finishes with a case study covering CMA preparation.  Once you have completed this chapter, you should be able to:

  • describe at least five differences between a formal appraisal and a CMA;
  • explain the three major sections of a typical CMA report form;
  • remember the information necessary to prepare a CMA;
  • suggest the best sources of information necessary to prepare a CMA;
  • discuss the major elements of comparison between the comparable property and the subject property;
  • correctly calculate the square footage of a building;
  • prepare a CMA which would allow a seller or buyer to understand values in the neighborhood.

INTRODUCTION

Real estate licensees who are involved in a transaction, either as a listing agent or selling agent normally should not perform an appraisal on the properties because they are not an objective party to the transaction.  In the normal course of business, however, licensees are called upon to prepare a comparative market analysis for the seller or buyer as a means to help them make informed decisions on pricing a property.  The estimate of value may not be called an appraisal

While the CMA closely follows the methodology used in the comparable sales approach to appraising, it should not be considered an appraisal.  Some of the differences are that:

  • a formal appraisal uses the three approaches to value: cost, market and income. The typical CMA provides a limited market data approach.
  • Appraisers usually make detailed analyses of the dollar adjustments necessary to reflect the differences in property characteristics. The CMA may include some major adjustments, but very often just shows raw data on prices.
  • Most appraisal reports provide a specific market value in dollar. A CMA often provides the parties to a transaction with a range of values.
  • Appraisal reports are concerned with prices actually paid in the marketplace. CMAs also use properties currently on the market and those that did not sell.
  • A licensee who is involved in a transaction as the listing or selling agent may prepare a CMA in order to assist the seller in establishing a listing price, or if working with the buyer, to assist the buyer in establishing an offering price.

       The CMA is most effective when prepared for pricing residential properties up to four units or for residential building lots in a subdivision.  It is usually not appropriate for commercial or large residential income properties.

       Many licensees arrange a visit prior to preparing a CMA to inspect and measure the property.  This reduces the changes for a surprise at the time of presentation.  Other licensees feel that a pre-presentation visit, while helpful, is not time effective.  Licensees must make their own judgments as to which method will provide the best results.

PREPARATION OF A COMPARATIVE MARKET ANALYSIS

CATEGORIES OF COMPARABLES

A CMA normally presents three major categories of properties; sold within the previous 12 months, currently on the market, and listings which expired during the previous 12 months.

Sold within the previous 12 months.  A review of properties which have sold within the previous 12 months provides sellers and buyers with very important information.  What is an appraisal of the property likely to show?  If there are some unusually high or low prices in the study, licensees should try to determine the reasons for the variance.  The most recent sales are the most reliable, especially in a changing market.  For the best marketing position, the seller should price the property just below the competition and just about recent sales.

Currently on the market.  A review of the prices of properties currently on the market shows what owners of properties with similar characteristics are asking.  Since buyers will normally select the property with the best price, all other things being equal, the seller should price his or her property appropriately.  The seller must understand that the asking prices are typically higher than the price sellers will receive.  Buyers should also request that a CMA be prepared, enabling them to see at a glance all the properties in the neighborhood that are on the market.

Expired during the previous 12 months.  This is a list of properties which had been listed but which failed to sell.  The most common reason is that the price was too high, considering the characteristics of the property.  Sellers can readily see that buyers have a resistance to overpriced listings.  It becomes clear to licensees that taking an overpriced listing is an exercise in futility which may generate ill will on the part of the seller.

       Obtaining information about comparable properties which will be used in the report is usually easier if the property is in a recorded subdivision with many sales.  It is more time-consuming if the property is in a rural area, because the location of comparable properties is less apparent.  The best sources for such information include:

  • MLS® records;
  • company files;
  • public records; and
  • other licensees.

MLS® records are the most convenient and comprehensive method of obtaining information about listings and sales. MLS® computer records may be searched by address, subdivision, size, price or any other criteria which might show comparable properties.  The major limitation with this source is the MLS® data usually only includes properties listed by a REALTOR®, and must be supplemented by another source.

       Company files usually provide the most information of any of the sources, but are limited in scope because they show only those properties listed or sold by the company.

       Public records show all recorded sales data, and are used to supplement the data.  Many county property appraisers and clerks in Mississippi are now on-line through the MLS® or the Internet.

       Other licensees are a good source of information on properties not normally listed in the MLS®, such as commercial, industrial or agricultural properties, or those in rural areas which don’t have a formal sharing service.

COMMON ELEMENTS OF COMPARISON

A CMA is useful for sellers and buyers only if it fairly reflects the interaction of supply and demand for a specific property.  For that reason, it is important that all properties used in the report be similar to the subject property is size, age, amenities and location.  Adjustments should be made for important differences such as swimming pools, condition, style and other items.  There are many amenities which must be considered when making a comparison.

Location.  Location is so important that only in unusual circumstances should the licensee use a property outside the neighborhood as a comparable.  Even within the same neighborhood, location may result in significant differences in value.  For example, a house next to a busy street normally has a lower value than a home in the subdivision’s interior.

 

TABLE 6.1                INFORMATION NEEDED TO PREPARE A COMPARATIVE MARKET ANALYSIS

Before starting on the analysis, the licensee will find it helpful to have the following information:

Information Necessary

Source(s)

Owners’ names and address

Owner, public records, city directory

Adequate description of the property

Owner’s deed, public records

Lot size (frontage and depth)

Owner’s survey, recorded plat maps

Number and size of rooms and total square footage

Inspection and measurement

Building’s construction and age

Inspection, owner, tax appraiser’s office

Information relative to the neighborhood (schools, churches, transportation)

Inspection, owner

Current taxes

Owner’s tax bill, tax appraiser’s office

Amount of existing financing

Owner’s records, mortgage status letter sent by licensee

Utilities and average payments

Owner’s records, utility company records

Appliances to be included in the transaction

Owner

Personal property and fixtures included in the sale

Owner

Zoning classification (especially important for vacant land)

City/county planning department

Environmental hazards

Owner

 

Size and shape of lot.  A level site usually is more valuable than a sloping site.  Also, bigger is usually better, and a rectangular lot often is more saleable than a pie-shaped lot.  And because buyers value privacy, they pay more for that feature.

Landscaping.  The licensee should evaluate trees and other greenery as to maturity and quality.  The enhanced curb appeal of a well-landscaped home can add thousands of dollars in market value.

Construction quality.  Variations in construction quality may result in significant differences in property value.  In some cases, the difference may disqualify the property from use as a comparable.

Style.  Generally, a home’s style should conform to that of the neighborhood.  Substantial differences may result if the licensee uses the average square-foot prices of ranch homes to estimate a two-story home’s value.  In this situation, the best comparables are other two-story homes.

Design.  Design features are important mainly if some homes in an area have floor plans that are not functional or that are not accepted by the market.  These are not good comparables for a home with a functional floor plan.

Age.  In some established subdivisions, building sites are still available.  The licensee should not use a new home as a comparable if preparing the CMA for a 20-year-old home.

Square feet of gross living area.  All homes shown on the CMA should be comparable in size.  Making dollar adjustments for small differences in size is relatively simple.  However, the licensee should not compare a 2,500-square-foot home to a 5,100-square-foot home.  Also, below-grade floor space is not considered gross living area (GLA) for most appraisals.  It has less value than above built above-grade.  The licensee must be careful to use only comparable properties.  If the licensee must make a square-foot adjustment, the licensee should not also adjust for number of bedrooms or for a family room, for example.  This may lead to a double adjustment for two items that really represent the same thing.

       It is important that the licensee measure the home accurately.  Using building plans or tax appraisal figures sometimes leads to costly errors.  Gross living area normally is calculated by taking exterior measurements, eliminating the garage and any workshops.  To practice calculate the square footage of gross living area in the home in Figure 6.1.

Number of rooms.  The total room count should not include the foyer, bathrooms or basement.  If a comparable property has four bedrooms and the subject has only three, the square-foot adjustment probably will account for any difference.  However, if one of the properties is a two-bedroom home in a neighborhood of three-bedroom and four-bedroom homes, an additional adjustment may be necessary.  The number of bathrooms can have a significant impact on value, particularly when one of the properties has only one bathroom.

Kitchen.  The market resists a kitchen with inadequate counter and storage space.  Also, poorly maintained counters and cabinet finish may cause a kitchen to appear outdated, compared to others in the neighborhood.  The age and condition of appliances also affect value.

Other space.  A screened-in porch or Florida room adds value even though it is not counted in gross living area.  The licensee should adjust for this difference.

Condition.  The licensee should make adjustments if the subject property needs repairs that the homeowner will not make.

Garage.  The licensee should make adjustments when the subject’s garage or carport size differs from comparable properties’ garages or carports.

Other improvements.  The licensee should evaluate swimming pools, decks, patios, storage sheds and other site improvements if they differ from comparable properties’ improvements.

 

FIGURE 6.1              CALCULATE THE SQUARE FOOTAGE OF GROSS LIVING AREA

 

 

 

 

 

 

 

 

 

 

 

ADJUSTMENT FOR DIFFERENCES

It would be ideal if comparable properties were identical to the subject property, but that situation rarely occurs.  Therefore, the licensee may need to adjust for major differences so that the CMA does not mislead the seller and buyer.  Making many adjustments for less significant items also may mislead and could give the appearance that the licensee is trying to “back in” to a predetermined value.

       All adjustments are made to the comparable property.  They may be remembered using the acronym CIA-CBS.

If the Comparable is Inferior, Add

If the Comparable is Better, Subtract

       After the licensee makes adjustments he or she should reconcile each category of property (for sale now, sold, expired).  While an appraiser usually reports a single dollar amount as the value, a real estate licensee often prefers to give a range of values.  This allows the seller to list the property somewhat higher than the sold properties.

COMPUTER-GENERATED CMA’S

Several excellent software programs organize the data the licensee collects into an attractive presentation.  Many MLS® service providers also offer built-in or optional software that allows REALTOR® members to download the comparable information directly into a listing presentation package.  Few of these programs provide a way to make adjustments, however.  The fact that a computer generates the information does not make the data correct.  The licensee should select only those properties comparable to the subject property.  Remember, garbage in, garbage out.

ATTACHMENTS TO CMA

Photos of comparable properties along with a plat map of the neighborhood make the CMA easier to understand.  A photograph of the home is a gift the owner may remember for a long time.

 

CASE STUDY—COMPARATIVE

MARKET ANALYSIS

The following case study will illustrate the process a licensee uses to prepare a comparative market analysis.  The licensee first must gather information necessary for a complete picture of the market in the neighborhood, including sales, listed properties and expired listings.  The next step is to enter the information in the appropriate section of the form.  The licensee must analyze the differences between the comparable property sales and the subject property, estimate the contribution value of the differences and make appropriate adjustments.  Each sale can then be properly compared to the subject in a way that is understandable to the property owner.

GATHERING INFORMATION

The licensee first must collect information about the subject property.  This is best accomplished by discussions with the owner and inspection of the property.  Then, the licensee should get information about property sales, usually through the property appraiser’s records and MLS® records.

Getting information from the owner.  You have just received a request from Wendell Kaski to discuss listing his family’s home. You ask for and receive some basic information.

  • Full names of all persons on the deed

Wendall J. Kaski and Sara Cook Kaski, HW

  • Property address

1810 Mayfair Road, Pascagoula, Mississippi

  • Owner’s home and office phone number

228-555-3496; 228-555-3487

  • Number of bedrooms and baths in the home

Four bedrooms, two baths

  • Description of extras in the home

Two-car garage, screened-in porch

  • Convenient time for an appointment. (If you decide to do a pre-presentation inspection of the property, you will need two appointments—one to inspect the property and one to present the CMA.)

7:20 this evening for an inspection of the property

 

Gathering information from the online tax rolls through the MLS® system.  The tax rolls for Jackson County show the following information for the property:

Legal description:                   Lot 29, Block C, Astoria Park,

                                                  Unit 4—Jackson County

Property tax appraisal:            $65,300

Annual taxes (including the

       Homestead exemption):    $877

Year built:                             1977

Base area:                             1,420 square feet (later verified

                                                   by physical measurement)

Total area:                             1,985 square feet (include

garage)

Last sale:                              1977

Last sale price:                       $37,100

Mortgage:                              Colonial Mortgage Company

 

       A search of the tax records shows seven sales in the subdivision within the previous year, ranging from $68,000 to $78,000.  Six of the seven sales were reported in the MLS®, which gives more information on which to base comparisons.  The sales are shown in the first section of the CMA (see Figure 6.2.)

       Four properties currently listed for sale in the MLS® are shown in the second section of the CMA.  Three listings that expired within the last 12 months are listed in the third section.

Analysis of amounts contributed by amenities.  Over time, in reviewing data on sold properties, we can estimate what a pool, a garage, an extra bedroom or a fireplace contributes to value.  The matched pair analysis compares similar houses with and without a particular feature.  The difference in price tends to indicate what the feature contributes in value.  For instance, look at sales 1 and 2 in Figure 6.2.  The only difference between the properties is a pool.  Based on this




 

limited test and a comparison of the prices, a pool seems to add about $4,000 to value.

       For the purpose of this CMA, we will assume that properties sold in the neighborhood show the following value contributions:

  • The contribution of a pool is $4,000
  • The contribution of a fireplace is $1,000
  • The contribution of an extra garage stall (two cars, rather than one) is $2,000
  • The contribution of extra square footage is $40 per square foot

The CMA has been completed, with the exception of the adjustments shown above.  Compare the subject property to each comparable property, and adjust the comparable property’s price.  Then complete the analysis and estimate the market range for the property.

SUMMARY

A real estate licensee, in the normal course of his or her business, often prepares a comparative market analysis (CMA) in order to give an opinion of value.  The CMA, while not an appraisal, uses the same method of comparison.  It is most effective when used for single-family homes and multifamily residences up to four units.

       The CMA form has three major sections: (1) properties sold within the previous 12 months; (2) properties currently on the market; and (3) properties listed during the previous 12 months that did not sell.  The licensee must gather information before actually preparing the CMA.  The information may be found in MLS® records, company files, and public records.

       The licensee must consider differences between the comparable properties and the subject property.  Important elements of comparison include location, age, size, condition and other improvements.  The licensee should adjust for major differences so that the CMA is not misleading.  The licensee can estimate the amount of adjustment by using matched pair analysis.  If two properties have been sold recently with only one major difference, such as a fireplace, the difference in price is the item’s contribution to value.  Once the licensee estimates the adjustment amount, he or she adjusts the comparable properties for differences from the subject property.

 

END-OF-CHAPTER QUESTIONS

  • Broker John is listing the Smiths’ town house on Mallard Avenue. As part of his service, he provides a free appraisal of the property.  Which of the following statements is true regarding this service?
    1. John may legally prepare the appraisal provided he does not charge for the service.
    2. John may not prepare and transmit an appraisal unless he is also a licensed or certified appraiser.
    3. John should avoid preparing an appraisal because of the possible perception of bias in the transaction. A broker’s price opinion is more appropriate because of this involvement in the transaction.
    4. John may prepare the appraisal if it will be used in a federally related transaction.

 

  • When a licensee prepares a CMA for a property she intends to list, the conclusions she draws from the CMA are called her:
    1. Appraised value.
    2. Opinion of value.
    3. Assessed value.
    4. Replacement value.
  • All of the following differences between an appraisal and a CMA are true except that:
    1. A CMA often provides the parties with a range of values rather than a specific value.
    2. While an appraisal is concerned primarily with properties sold, a CMA gives weight to properties currently on the market and those that did not sell.
    3. An appraisal provides the client with a range of values, while a CMA gives a specific value.
    4. An appraisal uses three approaches to value, when appropriate, while a CMA uses only one.
  • A seller who wants a reasonably quick sale for the best price should price the property just below:
    1. Expired listings and just above properties currently for sale.
    2. Sold listings and just above properties currently for sale.
    3. Properties currently for sale and just above sold properties.
    4. Sold properties and just above properties currently for sale.

 

  • All of the following conclusions that may be inferred about expired listings are true except that:
    1. Buyers resist overpriced listings.
    2. Overpriced listings often sell.
    3. Licensees waste their time taking overpriced listings.
    4. The properties were listed at unrealistically high prices.
  • The best place(s) to find a property’s legal description is (are):
    1. The owner’s deed.
    2. Utility company records.
    3. Public records of deed recordings.
    4. Both A and C.
  • The major sections of a CMA are:
    1. Sold, expired, withdrawn.
    2. Price, location, size.
    3. Sold, purchased, for sale.
    4. Sold, for sale, expired.
  • All of the following statements are true of CMA preparation except that:
    1. If the houses are comparable, it is common to use sales from different neighborhoods.
    2. Rectangular lots usually are more desirable than pie-shaped lots.
    3. A house next to a busy street normally has a lower value than one on a quiet street.
    4. A 2,500-square-foot home should not be compared with a 1,500-square-foot home.

 

  • Broker William is preparing a CMA. The subject property has a pool, which contributes $4,000 to value.  The comparable does not.  The adjustment is:
    1. + $4,000 to the subject.
    2. + $4,000 to the comparable.
    3. – $4,000 to the subject.
    4. – $4,000 to the comparable.

Use the following information to answer questions 10 and 11.

       House A sold for $90,000 and has 1,800 square feet with a pool, but no fireplace.  House B sold for $87,000 and has 1,800 square feet with a fireplace, but no pool.  House C sold for $85,000 and has 1,800 square feet with no pool or fireplace.  House D sold for $95,000 and has 1,900 square feet with a fireplace, but no pool.  The subject property has 1,900 square feet, a fireplace and a pool.

  • A licensee would find the value a pool contributes by comparing houses:
    1. A and B.
    2. A and C.
    3. C and D.
    4. B and C.
  • A licensee would find the value a fireplace contributes by comparing houses:
    1. A and B.
    2. A and C.
    3. B and C.
    4. D and B.

 

  • If an adjustment is made for square-foot differences between a subject property and a comparable property, the adjustment that usually results in double counting is one for:
    1. A swimming pool.
    2. An extra bedroom.
    3.  
    4.  
  • Which of the following is(are) not counted as gross living area?
    1. Screened-in patio
    2. Garage
    3. Below-grade floor space
    4. All of the above
  • A home measures 40 feet by 55 feet, which includes a 22-foot by 26-foot garage. What is the home’s gross living area?
    1. 2,200 square feet.
    2. 1,628 square feet.
    3. 1,500 square feet.
    4. 572 square feet.
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